How to Budget Your Money

When you see the green expert checkmark on a wikiHow article, you can trust that the article was co-authored by a qualified expert.

This particular article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in Business & Finance.

The authors of this article cited 9 references, which can be found at the bottom of the page.

A budget could help you crush your outstanding debt, take charge of your financial future and even become a happier, more relaxed person. Depending on your circumstances, a proper budget may not require that you spend less. Instead, you may simply have to make more effective financial decisions.

Gather what you need to start tracking your spending history. Collect past bills, bank and credit card statements, and receipts that can allow you to put together an accurate estimate of how much money you spend every month.

Consider using software to help you budget. Personal finance software is quickly becoming the new trend in finance. These programs have built-in budget making tools that can help customize your budget, along with analytics that help you project cash-flow into the future and better understand your spending habits. Some popular personal finance software include:

Create a spreadsheet. If you choose not to use a budgeting software, you can determine your own budget by using a simple spreadsheet. Your goal is to chart all your expenses and income during the course of a year, so make a spreadsheet that shows all your information clearly, allowing you to quickly identify any areas where you can spend smarter.[1]

Label the row of cells across the top (starting with cell B1) with the 12 months of the year.

Create a column of expenses and revenues in column A. You can list either revenues or expenses first, but try to group expenses together and revenues together to avoid confusion.

You may want to group expense together with category headings. For example, you might have a category of “utilities” that includes your electric, gas, water, and telephone bills.

Decide whether you want to include items that are deducted directly from your paycheck such as insurance, retirement savings, or taxes. If you do not include them on your spreadsheet, be sure that you list your net (post-deduction) income rather than your gross (total, pre-deduction) income under the “revenue” section.

Document your historical budget data for the last 12 months. Add all of your expenses and revenues for the past 12 months, using data from your bank and credit card statements to provide an accurate representation of all of your revenues and expenses.

Determine your overall monthly revenue history. Are you on a fixed salary where you know for certain how much you're taking home each week? Are you a freelancer whose salary varies each month? Documenting a year’s history can help you get an accurate view of your average monthly revenue. [2]

If you are an independent contractor or freelancer, keep in mind what you bring home is not the same thing as what you earn. For example, you may bring home $2,500 every month, but that's pre-tax. Figure out how much you're likely to need to pay in taxes and subtract that from your monthly income to arrive at a more accurate number.

If you are a salaried employee, don't factor in a possible tax refund into your overall income. Your monthly income should reflect only what you bring home after taxes. If you do get a tax refund, you'll get to do with it as you please; if you don't, you won't need to worry about it.

List all of your monthly expenses on the spreadsheet. What are the bills that you have to pay every month? How much do you spend every week on groceries and gasoline? Do you go out to dinner with friends every Friday night or to the movies once a week? How much money do you spend on shopping? Tracking a year of actual spending will help you develop an accurate view of your spending habits, since most people underestimate the amount they believe they spend every month.[3]

Analyze your revenue and expenses. If your expenses are greater than your revenue, you are living way beyond your means. Your budget should be divided into two groups:

Fixed Expenses. These include regular monthly expenses such as bills, insurance, loan debts, food, and necessary shopping items like clothing and household products.

Discretionary Expenses. Discretionary expenses are unfixed expenses that may be “optional.” Items that fall into this category include savings, entertainment, vacation funds, and other luxuries.

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Part 1 Quiz

What is an example of a discretionary expense?

Going to the movies.

Close! Going to the movies definitely counts as a discretionary expense, since it isn't a requirement to keep your house running or for getting you to work. Still, it's not the only example that fits the requirements. Guess again!

A vacation fund.

Almost! A vacation fund definitely isn't a necessity, like paying for gas or food. Still, the phrase "discretionary expenses" covers several areas. There’s a better option out there!

Close! Putting money into savings is tricky, since it's seems like it would be a fixed element of your budget. Still, if you need to pay the gas bill, that is a necessary output of resources, as opposed to saving money, which is there in case you need to pay the gas bill in the future. Try another answer...

All of the above.

That's right! All of these examples fit well into the category of "discretionary expenses." Unlike "fixed expenses," these payments are not necessary, and often revolve around luxury, travel, and savings. Read on for another quiz question.

Create a preliminary budget. The history established in Part 1 will help you create an accurate preliminary budget. You should calculate your fixed expenses and revenue, then decide how you want to spend your discretionary money.

To calculate fixed expenses, take an average for each month over the past year, then add about 5%. For example, if your power bill varies seasonally but averages to $210 per month, you should estimate the bill at $220 per month.

Be sure to account for changes to fixed expenses, such as paying off a student loan or adding a payment for a new car.

Set goals for the bulk of your discretionary spending. Now that you have determined how much discretionary money you should have leftover every month, decide how you want to spend that money. Your goal should be clear, explicit, and actionable. Some short-term goals may be:

Maximize tax advantages. There are ways of saving money that can offer tax benefits. If you put money directly from your paycheck into a 401(K) or personal IRA, the money can be deducted prior to being subject to taxes. Some companies even offer partial matching for retirement contributions, which can make your savings go even further.

Budget out the rest of your discretionary spending. This part of your budget is all about identifying values. What values do you have and how do you want to spend your money to realize them? Money, after all, is a means to an end, not an end in itself.

What sort of a person are you, and what do you like to do? Many people end up spending money on hobbies, interests, or charities. Think of this as investing in an experience or feeling of satisfaction.

Think about what makes you really happy. A popular theory is people who spend money on experiences are actually happier than people who spend money on possessions.[4]

Nope! There are very rare circumstances where traveling somewhere new and exciting can be considered a tax deduct. Still, it's smart to keep your taxes in mind when balancing your budget. That way you won't get hit with any nasty fines later and you can potentially find more ways to save. Try again...

It makes it easier to set your discretionary spending goals.

Try again! You're going to want to set your discretionary spending goals before you decide to travel. This way, you'll know how much money you have at your disposal and what your travel budget might be. Try again...

Experiences make people happier.

Nice! It's a common belief that experiences make people happier than buying things. Consider setting up a travel fund so you can avoid impulse buys and focus on putting your money into a trip or experience that is really going to matter. Read on for another quiz question.

Stick to your budget and don’t overspend. This is the first rule of budgeting, and pretty much the only one. It sounds fairly obvious, but it's easy to go over budget, even when you have one in place. Be mindful of your spending habits and what your money is going towards.[5]

Try to reduce your expenses. Larger expenses can be the most unpleasant but most effective ways to stay within a budget. If you take an annual vacation, consider staying home this year. Smaller expenses can also add up.

Try to identify and cut back on any expensive luxuries you enjoy. If you enjoy a weekly massage or have a preference for expensive wine, cut down on the frequency of these treats so you’re spending money on them only once a month or once every second month.

Save money on smaller expenses by switching to generic brands and eating home more often. Try not to go out to eat more than one or two times every week.[6]

See if you can reduce any of your fixed expenses by switching to a less expensive cell phone plan, reducing your television package, or improving your home’s energy efficiency.

Treat yourself periodically, but within reason. Your money has to work for you, not the other way around. You don’t want to feel like a slave to your budget, or to money in general, so it’s important to allow yourself a small treat every month that won’t break your budget.

Don't abuse your own rewards system to the point where it gets counterproductive and ends up affecting your budget. The idea is to treat yourself to smaller, cheaper items like a latte or a new shirt and to avoid splurging on more expensive items like a vacation or a pricey pair of shoes.

Pay off credit card balances every month. If you use credit cards, you should try to keep them at a zero balance every month to avoid costly fees. If you cannot pay off the current balances, prioritize paying them off within a reasonable time period so that you can get to zero balances.

Try switching to cash payments for most weekly purchases—particularly “extras” like eating out or coffee shop lattes. This can help you control your spending, as people are more aware of the money they’re spending when using cash than when swiping a card.

Cut your taxes. Take better advantage of itemized deductions when you file your taxes every year.

Start keeping your receipts, especially if you're an independent contractor and work from home or remotely. There are many amenities you can expense as part of your contract work when doing your taxes.[7]

It’s a good idea to research ways to get a better tax refund as a contractor or ask your accountant how you can get a better refund.

Don't count on windfalls. Don't factor in potential (unsure) sources of revenue, such as year-end bonuses, inheritances, or tax refunds. You only want to include guaranteed money in your budget.

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Part 3 Quiz

Why should you use cash to pay for "extras" in your life?

It's easier to keep track of.

Try again! In fact, it's much easier to keep track of your electronic payments, since you can always go back and check on them via your bank service. Still, there is a benefit to paying in cash. If you want to track the smaller purchases, consider keeping a budgeting app or notepage in your phone and save your receipts. Try another answer...

People are more aware of their spending with cash.

Absolutely! Credit cards and banking apps are very far removed from actually handling money. When you use cash for things like coffee or clothes, you're more in tune with your spending. Read on for another quiz question.

You won't rack up huge credit card bills with cash.

Not exactly. Of course, you can't rack up any bills if you pay in cash. Still, it's a good idea to use cash for smaller extras, like coffee and things that add up after a while, like clothing. Try another answer...

Community Q&A

To save, you must spend less than you make. If your allowance is low, you need to spend very little money, or find additional ways to make money. Every time you make a purchase, consider if you really need it, or if there might be a cheaper way to get it.

Decide what your priorities are, and stick to them. Self control is difficult, but not impossible, to master. Whenever you see something you want, but don't need, remind yourself of the reasons you want to save your money.

Stop buying anything you can live without. Eat nutritious food you have to cook yourself. Turn down the heat in the winter (wear extra clothing indoors). Have a garage sale: sell anything you don't use at least once a month.

Avoid debt in the form of high-interest credit cards and payday loans, as they will incur high interest and end up costing you quite a bit of money, especially if you will struggle to pay off your bill on time, every month.[9]

About This Article

This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in Business & Finance.

To budget your money, limit how often you're buying unnecessary luxuries like expensive clothes and name-brand products. Also, eat at home most nights instead of going out since restaurants can be more expensive. When you go grocery shopping, try to stick with generic brands, which will save you money each week. You can also shop around to find cheaper phone and internet plans so you're not spending as much every month. For tips on setting up your own monthly budget, keep reading!

Reader Success Stories

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Teresa Lynn

Dec 17, 2016

"I am a young, single female starting out on my own. I have been trying to start a sensible budget that I can follow and one that makes sense to me. Thank you! It can't get any easier than this! I even had websites wanting me to send them money and they would tell me how to save. I am pretty sure I'm ahead of their game already, and 100 dollars richer! Me knowing where my money is going and why it is going there reduces a tremendous amount of stress! Thanks, wikiHow!"..." more

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S. H. Usher

Mar 7, 2017

"I found that while I already knew most of what was here, the guide is still a very good explanation that helped me better conceptualize the concepts within. Definitely would recommend to a friend in need. Very nicely written, and the examples are great."..." more

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Betty Moss

Oct 5, 2016

"This has helped me a lot. By having a budget, it keeps me on track with my finances and I really like the spreadsheet idea because it gives me an opportunity to see exactly how much I'm spending and when my money is going. Thank you."..." more

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Clara Enock

Apr 4, 2017

"This article has helped me figure out my expenses, since I thought I was spending so little, while it's the other way around."..." more